By: William Hinder, EA | September 11th, 2025
If you care about saving money on taxes, there’s one rule you absolutely must understand: the step up in basis. Whether you’re expecting an inheritance or planning your own estate, knowing how basis adjustments work can protect you—and your loved ones—from massive and unnecessary tax bills.
In this guide, I’ll break down exactly what step up in basis means, how it works, the assets it applies to, and how strategic planning can legally save you tens of thousands of dollars in taxes.
I’ll also share a real-world case study at the end that shows how one family avoided a huge tax bill using smart planning.
Let’s get into it.
Step up in basis is a tax provision that resets the cost basis of inherited assets to their market value on the date of the owner’s death.
Step up in basis is a tax rule that increases the cost basis of inherited property to its current market value at the time of the previous owner’s death, eliminating the decedent’s unrealized capital gains.
This means any appreciation that happened during the original owner’s lifetime is essentially wiped out for tax purposes.
Your basis is what you originally paid for an asset. When you sell that asset, your capital gains tax is calculated on:
Sale Price – Basis = Taxable Gain
Without a step up in basis, inherited assets could come with enormous built-in gains—and therefore enormous tax bills.
But with step-up treatment, those gains disappear.
Let’s say your dad bought a beach house in 1980 for $100,000.
On the day he passes away, the property is worth $800,000.
If you inherit the property:
Your new basis becomes $800,000
The original $700,000 of appreciation is not taxed
If you sell it immediately, you pay $0 in capital gains tax
Now you can see why this is such a powerful tax planning tool.
But here’s the huge mistake people make…
If your dad gifts the property to you before he dies, you get his original basis, not the stepped-up basis.
Meaning:
Your basis = $100,000
If you sell at $800,000, you owe tax on $700,000 of gains
At a 20% long-term capital gains rate, that’s a $140,000 tax bill—money you did not need to pay.
This is why tax planning is critical.
Most capital assets do qualify, including:
Real estate
Stocks
Bonds
Mutual funds
Digital assets & crypto
Artwork and collectibles
Many other tangible and financial assets
Assets NOT eligible for step up in basis
These do not receive stepped-up treatment:
Traditional IRAs
Roth IRAs
401(k)s
Pensions
Tax-deferred annuities
Gifts made before death
That last one is the most common and costly mistake families make.
Many people believe gifting a home early helps avoid probate or “simplifies things.” But for tax purposes, gifts come with a dangerous downside:
The recipient receives the giver’s original basis—not a stepped-up basis.
This can trigger massive capital gains taxes that could have been avoided with proper planning.
Tom and Sandy, married and living in a common-law state, came to us with a problem:
Their joint investment account had $500,000 in capital gains
They also had $40,000 in capital losses
Tom had been diagnosed with cancer and was planning ahead to protect Sandy financially.
Option 1: Do Nothing
If they kept the account as-is:
Only half of the gains ($250,000) would receive a step up in basis
Only half the losses ($20,000) would transfer
Sandy would owe taxes on the remaining $250,000 when she eventually sold the investments.
Option 2: Strategic Planning (The Good Option)
We restructured the accounts:
Appreciated assets moved into Tom’s individual account
Loss positions moved into Sandy’s individual account
After Tom passed:
Sandy received a full step up in basis on all $500,000 of gains
Sandy retained the full $40,000 in losses
She could sell everything tax-free, or use losses to offset future gains
This planning saved her tens of thousands in taxes.
Important note:
The appreciated assets must be held for at least one year to qualify for the step up in basis rule.
This rule prevents people from moving assets right before death simply to game the system.
Stepped up basis isn’t just an inheritance perk—it’s a major piece of long-term tax planning.
Here’s how it helps:
Reduces or eliminates capital gains taxes for heirs
Protects families from surprise tax bills
Helps you pass on wealth more efficiently
Allows strategic shifting of appreciated assets
Prevents paying taxes unnecessarily to the IRS
This strategy isn’t just for the wealthy.
Anyone with appreciated assets should understand how to use the step up in basis to reduce lifetime taxes.
Does step up in basis apply to a house?
Yes—real estate generally qualifies for a full step up in basis when inherited.
Do retirement accounts get a step up in basis?
No. IRAs, 401(k)s, and annuities are taxed differently.
What if I sell the inherited asset right away?
If sold at the stepped-up value, capital gains tax is typically zero.
Does gifting affect step up in basis?
Yes. Gifts do not receive a step up in basis and retain the original basis.
The step up in basis rule can be one of the most powerful tools to reduce taxes—if you know how to use it correctly.
Working with a tax strategist or financial planner ensures you avoid costly mistakes, especially around structuring inherited or appreciated assets.
If you want a complete road map to early retirement that includes tax planning, investment strategy, safe withdrawal modeling, and pre-age 59.5 income design—I can help.
📊 Let’s create a retirement plan that helps you invest smarter, lower taxes, and make work optional.
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